UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2007MARCH 31, 2008
Commission file number: 1-1463
UNION CARBIDE CORPORATION
(Exact name of registrant as specified in its charter)
New York | 13-1421730 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) |
400 West Sam Houston Parkway South, Houston, Texas 77042
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: 713-978-2016
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a non-accelerated filer.smaller reporting company. See definitiondefinitions of “large accelerated filer,” “accelerated filerfiler” and large accelerated filer”“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | |
Non-accelerated filer x | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes x No
At September 30, 2007,March 31, 2008, 1,000 shares of common stock were outstanding, all of which were held by the registrant’s parent, The Dow Chemical Company.
The registrant meets the conditions set forth in General Instructions H(1)(a) and (b) for Form 10-Q and is therefore filing this form with a reduced disclosure format.
Union Carbide Corporation
TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations. | |||
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2
PART I - - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.Financial Statements.
Union Carbide Corporation and Subsidiaries
Consolidated Statements of Income
|
| Three Months Ended |
| |||||||||||||||||
|
| Three Months Ended |
| Nine Months Ended |
|
| March 31, |
| March 31, |
| ||||||||||
In millions (Unaudited) |
| Sept. 30, |
| Sept. 30, |
| Sept. 30, |
| Sept. 30, |
|
| 2008 |
| 2007 |
| ||||||
Net trade sales |
| $ | 51 |
| $ | 55 |
| $ | 153 |
| $ | 429 |
|
| $ | 46 |
| $ | 53 |
|
Net sales to related companies |
| 1,812 |
| 1,845 |
| 5,335 |
| 5,300 |
|
| 1,989 |
| 1,673 |
| ||||||
Total Net Sales |
| 1,863 |
| 1,900 |
| 5,488 |
| 5,729 |
|
| 2,035 |
| 1,726 |
| ||||||
Cost of sales |
| 1,703 |
| 1,727 |
| 5,031 |
| 4,966 |
|
| 1,961 |
| 1,598 |
| ||||||
Research and development expenses |
| 15 |
| 17 |
| 56 |
| 57 |
|
| 19 |
| 20 |
| ||||||
Selling, general and administrative expenses |
| 3 |
| 4 |
| 14 |
| 16 |
|
| 3 |
| 7 |
| ||||||
Restructuring charges |
| — |
| 13 |
| — |
| 13 |
| |||||||||||
Equity in earnings of nonconsolidated affiliates |
| 130 |
| 144 |
| 369 |
| 288 |
|
| 54 |
| 124 |
| ||||||
Sundry expense - net |
| 6 |
| 16 |
| 33 |
| 60 |
| |||||||||||
Sundry income (expense) - net |
| 70 |
| (10 | ) | |||||||||||||||
Interest income |
| 49 |
| 34 |
| 129 |
| 92 |
|
| 32 |
| 37 |
| ||||||
Interest expense and amortization of debt discount |
| 12 |
| 14 |
| 38 |
| 40 |
|
| 12 |
| 15 |
| ||||||
Income before Income Taxes |
| 303 |
| 287 |
| 814 |
| 957 |
|
| 196 |
| 237 |
| ||||||
Provision for income taxes |
| 167 |
| 69 |
| 297 |
| 301 |
|
| 41 |
| 51 |
| ||||||
Net Income Available for Common Stockholder |
| $ | 136 |
| $ | 218 |
| $ | 517 |
| $ | 656 |
|
| $ | 155 |
| $ | 186 |
|
Depreciation |
| $ | 64 |
| $ | 67 |
| $ | 202 |
| $ | 206 |
|
| $ | 65 |
| $ | 68 |
|
Capital Expenditures |
| $ | 85 |
| $ | 51 |
| $ | 185 |
| $ | 146 |
|
| $ | 40 |
| $ | 46 |
|
See Notes to the Consolidated Financial Statements.
3
Union Carbide Corporation and Subsidiaries
|
| March 31, |
| Dec. 31, |
| ||
In millions (Unaudited) |
| 2008 |
| 2007 |
| ||
Assets |
|
|
|
|
| ||
Current Assets |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 24 |
| $ | 22 |
|
Accounts receivable: |
|
|
|
|
| ||
Trade (net of allowance for doubtful receivables - 2008: $2; 2007: $2) |
| 26 |
| 26 |
| ||
Related companies |
| 582 |
| 487 |
| ||
Other |
| 117 |
| 129 |
| ||
Notes receivable from related companies |
| 3,567 |
| 3,227 |
| ||
Inventories |
| 191 |
| 178 |
| ||
Deferred income tax assets - current |
| 33 |
| 60 |
| ||
Total current assets |
| 4,540 |
| 4,129 |
| ||
Investments |
|
|
|
|
| ||
Investments in related companies |
| 972 |
| 972 |
| ||
Investments in nonconsolidated affiliates |
| 432 |
| 385 |
| ||
Other investments |
| 22 |
| 22 |
| ||
Noncurrent receivables |
| 46 |
| 46 |
| ||
Noncurrent receivable from related company |
| 299 |
| 306 |
| ||
Total investments |
| 1,771 |
| 1,731 |
| ||
Property |
|
|
|
|
| ||
Property |
| 7,544 |
| 7,509 |
| ||
Less accumulated depreciation |
| 5,607 |
| 5,547 |
| ||
Net property |
| 1,937 |
| 1,962 |
| ||
Other Assets |
|
|
|
|
| ||
Goodwill |
| 26 |
| 26 |
| ||
Other intangible assets (net of accumulated amortization - 2008: $129; 2007: $128) |
| 21 |
| 22 |
| ||
Deferred income tax assets - noncurrent |
| 123 |
| 112 |
| ||
Asbestos-related insurance receivables - noncurrent |
| 695 |
| 696 |
| ||
Pension assets |
| 716 |
| 699 |
| ||
Deferred charges and other assets |
| 86 |
| 88 |
| ||
Total other assets |
| 1,667 |
| 1,643 |
| ||
Total Assets |
| $ | 9,915 |
| $ | 9,465 |
|
See Notes to the Consolidated Financial Statements.
4
Union Carbide Corporation and Subsidiaries
In millions (Unaudited) |
| Sept. 30, |
| Dec. 31, |
| ||
Assets |
|
|
|
|
| ||
Current Assets |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 78 |
| $ | 71 |
|
Accounts receivable: |
|
|
|
|
| ||
Trade (net of allowance for doubtful receivables - 2007: $1; 2006: $2) |
| 21 |
| 33 |
| ||
Related companies |
| 318 |
| 449 |
| ||
Other |
| 144 |
| 145 |
| ||
Notes receivable from related companies |
| 3,031 |
| 2,547 |
| ||
Inventories |
| 179 |
| 199 |
| ||
Deferred income tax assets - current |
| 41 |
| 41 |
| ||
Total current assets |
| 3,812 |
| 3,485 |
| ||
Investments |
|
|
|
|
| ||
Investments in related companies |
| 297 |
| 297 |
| ||
Investments in nonconsolidated affiliates |
| 1,011 |
| 896 |
| ||
Other investments |
| 22 |
| 23 |
| ||
Noncurrent receivables |
| 59 |
| 58 |
| ||
Noncurrent receivables from related companies |
| 307 |
| 187 |
| ||
Total investments |
| 1,696 |
| 1,461 |
| ||
Property |
|
|
|
|
| ||
Property |
| 7,458 |
| 7,459 |
| ||
Less accumulated depreciation |
| 5,500 |
| 5,489 |
| ||
Net property |
| 1,958 |
| 1,970 |
| ||
Other Assets |
|
|
|
|
| ||
Goodwill |
| 26 |
| 26 |
| ||
Other intangible assets (net of accumulated amortization - 2007: $126; 2006: $122) |
| 23 |
| 25 |
| ||
Deferred income tax assets - noncurrent |
| 122 |
| 115 |
| ||
Asbestos-related insurance receivables - noncurrent |
| 687 |
| 725 |
| ||
Deferred charges and other assets |
| 422 |
| 383 |
| ||
Total other assets |
| 1,280 |
| 1,274 |
| ||
Total Assets |
| $ | 8,746 |
| $ | 8,190 |
|
|
| March 31, |
| Dec. 31, |
| ||
In millions (Unaudited) |
| 2008 |
| 2007 |
| ||
Liabilities and Stockholder’s Equity |
|
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Current Liabilities |
|
|
|
|
| ||
Notes payable - related companies |
| $ | 6 |
| $ | 5 |
|
Accounts payable: |
|
|
|
|
| ||
Trade |
| 255 |
| 239 |
| ||
Related companies |
| 521 |
| 391 |
| ||
Other |
| 40 |
| 29 |
| ||
Income taxes payable |
| 183 |
| 185 |
| ||
Asbestos-related liabilities - current |
| 123 |
| 141 |
| ||
Accrued and other current liabilities |
| 181 |
| 180 |
| ||
Total current liabilities |
| 1,309 |
| 1,170 |
| ||
Long-Term Debt |
| 820 |
| 820 |
| ||
Other Noncurrent Liabilities |
|
|
|
|
| ||
Pension and other postretirement benefits - noncurrent |
| 456 |
| 461 |
| ||
Asbestos-related liabilities - noncurrent |
| 959 |
| 1,001 |
| ||
Other noncurrent obligations |
| 362 |
| 356 |
| ||
Total other noncurrent liabilities |
| 1,777 |
| 1,818 |
| ||
Minority Interest in Subsidiaries |
| 2 |
| 2 |
| ||
Stockholder’s Equity |
|
|
|
|
| ||
Common stock (authorized and issued: 1,000 shares of $0.01 par value each) |
| — |
| — |
| ||
Additional paid-in capital |
| 312 |
| 121 |
| ||
Retained earnings |
| 5,922 |
| 5,767 |
| ||
Accumulated other comprehensive loss |
| (227 | ) | (233 | ) | ||
Net stockholder’s equity |
| 6,007 |
| 5,655 |
| ||
Total Liabilities and Stockholder’s Equity |
| $ | 9,915 |
| $ | 9,465 |
|
See Notes to the Consolidated Financial Statements.
45
Union Carbide Corporation and Subsidiaries
In millions (Unaudited) |
| Sept. 30, |
| Dec. 31, |
| ||
Liabilities and Stockholder’s Equity |
|
|
|
|
| ||
Current Liabilities |
|
|
|
|
| ||
Notes payable: |
|
|
|
|
| ||
Related companies |
| $ | 4 |
| $ | 8 |
|
Other |
| — |
| 1 |
| ||
Accounts payable: |
|
|
|
|
| ||
Trade |
| 209 |
| 292 |
| ||
Related companies |
| 261 |
| 252 |
| ||
Other |
| 62 |
| 40 |
| ||
Income taxes payable |
| 149 |
| 49 |
| ||
Asbestos-related liabilities - current |
| 103 |
| 129 |
| ||
Pension and other postretirement benefits - current |
| 56 |
| 56 |
| ||
Accrued and other current liabilities |
| 158 |
| 116 |
| ||
Total current liabilities |
| 1,002 |
| 943 |
| ||
Long-Term Debt |
| 820 |
| 820 |
| ||
Other Noncurrent Liabilities |
|
|
|
|
| ||
Pension and other postretirement benefits - noncurrent |
| 499 |
| 518 |
| ||
Asbestos-related liabilities - noncurrent |
| 1,061 |
| 1,079 |
| ||
Other noncurrent obligations |
| 478 |
| 407 |
| ||
Total other noncurrent liabilities |
| 2,038 |
| 2,004 |
| ||
Minority Interest in Subsidiaries |
| 2 |
| 3 |
| ||
Stockholder’s Equity |
|
|
|
|
| ||
Common stock (1,000 shares authorized and issued) |
| — |
| — |
| ||
Additional paid-in capital |
| 121 |
| 121 |
| ||
Retained earnings (includes cumulative effect of adopting FIN No. 48 of $(67)) |
| 5,232 |
| 4,782 |
| ||
Accumulated other comprehensive loss |
| (469 | ) | (483 | ) | ||
Net stockholder’s equity |
| 4,884 |
| 4,420 |
| ||
Total Liabilities and Stockholder’s Equity |
| $ | 8,746 |
| $ | 8,190 |
|
See Notes to the Consolidated Financial Statements.
5
Union Carbide Corporation and Subsidiaries
Consolidated Statements of Cash Flows
|
| Three Months Ended |
| |||||||||||
|
| Nine Months Ended |
|
| March 31, |
| March 31, |
| ||||||
In millions (Unaudited) |
| Sept. 30, |
| Sept. 30, |
|
| 2008 |
| 2007 |
| ||||
Operating Activities |
|
|
|
|
|
|
|
|
|
| ||||
Net Income Available for Common Stockholder |
| $ | 517 |
| $ | 656 |
|
| $ | 155 |
| $ | 186 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
| ||||
Depreciation and amortization |
| 232 |
| 227 |
|
| 81 |
| 78 |
| ||||
Provision (Credit) for deferred income tax |
| 54 |
| (3 | ) | |||||||||
Earnings of nonconsolidated affiliates less than (in excess of) dividends received |
| (113 | ) | 4 |
| |||||||||
Provision (credit) for deferred income tax |
| 60 |
| (37 | ) | |||||||||
Earnings of nonconsolidated affiliates in excess of (less than) dividends received |
| (42 | ) | 96 |
| |||||||||
Net gain on sales of property |
| (11 | ) | — |
|
| (7 | ) | (1 | ) | ||||
Restructuring charges |
| — |
| 13 |
| |||||||||
Pension contribution |
| (2 | ) | — |
| |||||||||
Other gain, net |
| (1 | ) | — |
| |||||||||
Pension contributions |
| (1 | ) | — |
| |||||||||
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
| ||||
Accounts and notes receivable |
| 8 |
| 22 |
|
| 11 |
| 8 |
| ||||
Related company receivables |
| (460 | ) | (588 | ) |
| (436 | ) | (244 | ) | ||||
Inventories |
| 20 |
| (23 | ) |
| (13 | ) | (7 | ) | ||||
Accounts payable |
| (53 | ) | (33 | ) |
| 47 |
| (51 | ) | ||||
Related company payables |
| 5 |
| (64 | ) |
| 131 |
| (42 | ) | ||||
Other assets and liabilities |
| (7 | ) | (59 | ) |
| 44 |
| 85 |
| ||||
Cash provided by operating activities |
| 190 |
| 152 |
|
| 29 |
| 71 |
| ||||
Investing Activities |
|
|
|
|
|
|
|
|
|
| ||||
Capital expenditures |
| (185 | ) | (146 | ) |
| (40 | ) | (46 | ) | ||||
Distributions from nonconsolidated affiliates |
| — |
| 4 |
| |||||||||
Changes in noncurrent receivable from related company |
| (13 | ) | (1 | ) | |||||||||
Change in noncurrent receivable from related company |
| 7 |
| (20 | ) | |||||||||
Proceeds from sales of property |
| 17 |
| 2 |
|
| 6 |
| 3 |
| ||||
Purchases of investments |
| (7 | ) | (11 | ) |
| (2 | ) | (1 | ) | ||||
Proceeds from sales of investments |
| 6 |
| 3 |
|
| 2 |
| — |
| ||||
Cash used in investing activities |
| (182 | ) | (149 | ) |
| (27 | ) | (64 | ) | ||||
Financing Activities |
|
|
|
|
|
|
|
|
|
| ||||
Changes in short-term notes payable |
| (1 | ) | (1 | ) |
| — |
| (1 | ) | ||||
Payments on long-term debt |
| — |
| (2 | ) | |||||||||
Cash used in financing activities |
| (1 | ) | (3 | ) |
| — |
| (1 | ) | ||||
Summary |
|
|
|
|
|
|
|
|
|
| ||||
Increase in cash and cash equivalents |
| 7 |
| — |
|
| 2 |
| 6 |
| ||||
Cash and cash equivalents at beginning of year |
| 71 |
| 73 |
|
| 22 |
| 71 |
| ||||
Cash and cash equivalents at end of period |
| $ | 78 |
| $ | 73 |
|
| $ | 24 |
| $ | 77 |
|
See Notes to the Consolidated Financial Statements.
Union Carbide Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
|
| Three Months Ended |
| |||||||||||||||||
|
| Three Months Ended |
| Nine Months Ended |
|
| March 31, |
| March 31, |
| ||||||||||
In millions (Unaudited) |
| Sept. 30, |
| Sept. 30, |
| Sept. 30, |
| Sept. 30, |
|
| 2008 |
| 2007 |
| ||||||
Net Income Available for Common Stockholder |
| $ | 136 |
| $ | 218 |
| $ | 517 |
| $ | 656 |
|
| $ | 155 |
| $ | 186 |
|
Other Comprehensive Income (Loss), Net of Tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Translation adjustments |
| 3 |
| (1 | ) | 1 |
| — |
| |||||||||||
Adjustments to pension and other postretirement benefit plans |
| 5 |
| — |
| 13 |
| — |
| |||||||||||
Cumulative translation adjustment |
| 6 |
| — |
| |||||||||||||||
Pension and other postretirement benefit plans adjustment |
| 1 |
| 4 |
| |||||||||||||||
Net loss on cash flow hedging derivative instruments |
| — |
| (2 | ) | — |
| (1 | ) |
| (1 | ) | — |
| ||||||
Total other comprehensive income (loss) |
| 8 |
| (3 | ) | 14 |
| (1 | ) | |||||||||||
Total other comprehensive income |
| 6 |
| 4 |
| |||||||||||||||
Comprehensive Income |
| $ | 144 |
| $ | 215 |
| $ | 531 |
| $ | 655 |
|
| $ | 161 |
| $ | 190 |
|
See Notes to the Consolidated Financial Statements.
6
Union Carbide Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
NOTE A CONSOLIDATED FINANCIAL STATEMENTS
The unaudited interim consolidated financial statements of Union Carbide Corporation and its subsidiaries (the “Corporation” or “UCC”) were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and reflect all adjustments (including normal recurring accruals) which, in the opinion of management, are considered necessary for the fair presentation of the results for the periods presented.
The Corporation is a wholly owned subsidiary of The Dow Chemical Company (“Dow”). In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings Per Share,” the presentation of earnings per share is not required in financial statements of wholly owned subsidiaries.
The Corporation’s business activities comprise components of Dow’s global operations rather than stand-alone operations. Dow conducts its worldwide operations through global businesses. Because there are no separable reportable business segments for UCC under SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” and no detailed business information is provided to a chief operating decision maker regarding the Corporation’s stand-alone operations, the Corporation’s results are reported as a single operating segment.
Intercompany transactions and balances are eliminated in consolidation. Transactions with the Corporation’s parent company, Dow, or other Dow subsidiaries have been reflected as related company transactions in the consolidated financial statements. See Note GI for further discussion.
Certain reclassifications of prior year’s amounts have been made to conform to the presentation adopted for 2007. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2006.2007.
NOTE B RECENT ACCOUNTING PRONOUNCEMENTS
In JuneSeptember 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”)SFAS No. 48, “Accounting for Uncertainty in Income Taxes,157, “Fair Value Measurements,” which clarifies thedefines fair value, establishes a framework for measuring fair value in U.S. GAAP, and expands disclosures about fair value measurements. The Statement applies under other accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109. This interpretation prescribes a recognition thresholdpronouncements that require or permit fair value measurements and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN No. 48 was effective for fiscal years beginning after DecemberNovember 15, 2006.
2007. In February 2008, the FASB issued FASB Staff Position (“FSP”) FAS 157-2 which delayed the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statement on a recurring basis, to fiscal years beginning after November 15, 2008. On January 1, 2007,2008, the Corporation adopted the provisionsportion of FINSFAS No. 48. The cumulative effect of adoption157 that was a $67 million reduction of retained earnings. At January 1, 2007,not delayed, and since the total amount of unrecognized tax benefits was $251 million, of which $217 million would impactCorporation’s existing fair value measurements are consistent with the effective tax rate, if recognized. Interest and penalties associated with uncertain tax positions are recognized as componentsguidance of the “Provision for income taxes.” The Corporation’s accrual for interest and penalties was $36 million uponStatement, the partial adoption of FIN No. 48.
the Statement did not have a material impact on the Corporation’s consolidated financial statements. The Corporation is included in Dow’s consolidated federal income tax groupuses a December 31 measurement date for its pension and consolidated tax return. For Dow, the tax years 1998-2003 are currently under audit by the U.S. Internal Revenue Service and the review of these years is expected to be completed during 2007. It is reasonably possible that a reduction in the unrecognized tax benefits may occur (which may impact UCC’s unrecognized tax benefits); however, quantification of an estimated range cannot be made at this time.
Whileother postretirement plans; therefore, the Corporation is subjectstill evaluating the impact of adopting the Statement for its plan assets. The adoption of the deferred portion of the Statement on January 1, 2009 is not expected to taxation in certain foreign jurisdictions, its major tax jurisdictions are in the United States. The tax years that remain subject to examination in the United States are 1998 through 2006 for federal income taxes and 2002 through 2006 for state and local income taxes. The effective tax rate for the third quarter of 2007 was 55.1 percent compared with 24.0 percent for the same quarter last year. The effective tax rate for the third quarter of 2007 was negatively affected by an increase in the estimated annual tax rate for 2007, caused byhave a revised forecast of earnings for the Corporation, and the recognition of tax contingencies. Year to date, the effective tax rate was 36.5 percent versus 31.5 percent last year.
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R).” This Statement, which was effective December 31, 2006 for the Corporation, required employers to recognize the funded status of defined benefit postretirement plans as an asset or liabilitymaterial impact on the balance sheet and to recognize changes in that funded status through comprehensive income.Corporation’s consolidated financial statements. See Note F for the Corporation’sexpanded disclosures related to pension and other postretirement benefits.about fair value measurements.
SAB No. 74 Disclosures for Accounting Standards Issued But Not Yet Adopted
In September 2006,December 2007, the FASB revised SFAS No. 141, “Business Combinations,” to establish revised principles and requirements for how entities will recognize and measure assets and liabilities acquired in a business combination. The Statement is effective for business combinations completed on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Corporation will apply the guidance of the Statement to business combinations completed on or after January 1, 2009.
In December 2007, the FASB issued SFAS No. 157, “Fair Value Measurements,160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51.” which defines fair value,The Statement establishes accounting and reporting standards for the noncontrolling interest in a frameworksubsidiary and for measuring fair value in GAAP, and expands disclosures about fair value measurements. Thisthe deconsolidation of a subsidiary. The Statement applies under other accounting pronouncements that require or permit fair value measurements and is effective for fiscal yearson or after the beginning of the first annual reporting period beginning on or after NovemberDecember 15, 2007.2008. The Corporation is currently evaluating the impact of adopting this Statement.the Statement on January 1, 2009.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133.” The Statement requires enhanced disclosures about an entity’s derivative and hedging activities. The Statement is effective for fiscal years and interim periods beginning after November 15, 2008. The Corporation is evaluating the additional disclosures required by the Statement beginning January 1, 2009.
7
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115,” which permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Corporation is currently evaluating if it will elect the fair value option for any of its eligible financial instruments and other items.
NOTE C RESTRUCTURING
In Aprilthe fourth quarter of 2007, the FASB issued FASB Staff Position (“FSP”) No. FIN 39-1, “AmendmentCorporation recorded restructuring charges totaling $55 million resulting from decisions made by management to make organizational changes within targeted support functions in West Virginia and to shut down certain assets in Louisiana to enhance the efficiency and cost effectiveness of FASB Interpretation No. 39.” This FSP replaces certain terms in FIN No. 39 with “derivative instruments” (as defined in SFAS No. 133) and permits the offsettingCorporation’s operations. The charges included severance of fair value amounts recognized$17 million for the right to reclaim cash collateral or the obligation to return cash collateral against fair value amounts recognized for derivative instruments executeda workforce reduction of approximately 225 people; curtailment costs of $12 million associated with the same counterparty underCorporation’s defined benefit plans; and the same master netting arrangement. $26 million write-off of the net book value and associated exit costs of the polypropylene manufacturing facility at St. Charles Operations in Hahnville, Louisiana, which was shut down at the end of 2007. As of March 31, 2008, severance of $1 million had been paid to 28 employees, and a liability of $16 million remained for approximately 200 employees.
The FSP is effective for fiscal years beginning after November 15, 2007. The Corporation is currently evaluatingfollowing table summarizes 2008 activities related to the impact of applying the guidance in this FSP.Corporation’s restructuring reserve:
2008 Activities Related to 2007 Restructuring
In millions |
| Costs |
| Severance |
| Total |
| |||
Reserve balance at December 31, 2007 |
| $ | 12 |
| $ | 17 |
| $ | 29 |
|
Cash payments |
| — |
| (1 | ) | (1 | ) | |||
Reserve balance at March 31, 2008 |
| $ | 12 |
| $ | 16 |
| $ | 28 |
|
NOTE CD INVENTORIES
The following table provides a breakdown of inventories:
Inventories
Inventories In millions |
| Sept. 30, |
| Dec. 31, |
| |||||||||
In millions |
| March 31, |
| Dec. 31, |
| |||||||||
Finished goods |
| $ | 25 |
| $ | 35 |
|
| $ | 49 |
| $ | 17 |
|
Work in process |
| 33 |
| 40 |
|
| 9 |
| 40 |
| ||||
Raw materials |
| 43 |
| 37 |
|
| 55 |
| 47 |
| ||||
Supplies |
| 78 |
| 87 |
|
| 78 |
| 74 |
| ||||
Total inventories |
| $ | 179 |
| $ | 199 |
|
| $ | 191 |
| $ | 178 |
|
The reserves reducing inventories from the first-in, first-out (“FIFO”) basis to the last-in, first-out (“LIFO”) basis amounted to $163$206 million at September 30, 2007March 31, 2008 and $160$183 million at December 31, 2006.2007.
NOTE DE OTHER INTANGIBLE ASSETS
The following table provides information regarding the Corporation’s other intangible assets:
Other Intangible Assets
Other Intangible Assets |
| At September 30, 2007 |
| At December 31, 2006 |
| |||||||||||||||||||||||||||||||||
|
| At March 31, 2008 |
| At December 31, 2007 |
| |||||||||||||||||||||||||||||||||
In millions |
| Gross Carrying Amount |
| Accumulated |
| Net |
| Gross Carrying Amount |
| Accumulated Amortization |
| Net |
|
| Gross |
| Accumulated |
| Net |
| Gross |
| Accumulated |
| Net |
| ||||||||||||
Intangible assets with finite lives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Licenses and intellectual property |
| $ | 33 |
| $ | (33 | ) | — |
| $ | 33 |
| $ | (32 | ) | $ | 1 |
|
| $ | 33 |
| $ | (33 | ) | — |
| $ | 33 |
| $ | (32 | ) | $ | 1 |
| ||
Patents |
| 2 |
| (1 | ) | $ | 1 |
| 3 |
| (2 | ) | 1 |
|
| 2 |
| (1 | ) | $ | 1 |
| 3 |
| (2 | ) | 1 |
| ||||||||||
Software |
| 114 |
| (92 | ) | 22 |
| 111 |
| (88 | ) | 23 |
|
| 115 |
| (95 | ) | 20 |
| 114 |
| (94 | ) | 20 |
| ||||||||||||
Total |
| $ | 149 |
| $ | (126 | ) | $ | 23 |
| $ | 147 |
| $ | (122 | ) | $ | 25 |
| |||||||||||||||||||
Total other intangible assets |
| $ | 150 |
| $ | (129 | ) | $ | 21 |
| $ | 150 |
| $ | (128 | ) | $ | 22 |
|
Amortization expense for software, which is included in “Cost of sales,” was $2 million in the first quarter of 2008 and $1 million in the first quarter of 2007. Amortization expense for other intangible assets (not including software) was immaterial in the first quarter of 2008 and the first quarter of 2007. Total estimated amortization expense for 20072008 and the next five succeeding fiscal years is as follows:
Estimated Amortization Expense for Next Five Years |
|
|
|
In millions |
|
|
|
2007 |
| $ 5 |
|
2008 |
| $ 6 |
|
2009 |
| $ 6 |
|
2010 |
| $ 6 |
|
2011 |
| $ 4 |
|
2012 |
| — |
|
8
Estimated Amortization Expense |
|
|
| |
2008 |
| $ | 7 |
|
2009 |
| $ | 7 |
|
2010 |
| $ | 6 |
|
2011 |
| $ | 1 |
|
2012 |
| — |
| |
2013 |
| — |
|
NOTE EF FAIR VALUE MEASUREMENTS
The following table summarizes the bases used to measure certain assets and liabilities at fair value on a recurring basis in the consolidated balance sheets:
Basis of Fair Value Measurements
|
|
|
| Significant Other |
| ||
In millions |
| At March 31 |
|
| |||
Assets at fair value: |
|
|
|
|
| ||
Debt securities (1) |
| $ | 18 |
| $ | 18 |
|
(1) Included in “Other investments” in the consolidated balance sheets.
Assets that are measured using significant other observable inputs are primarily valued by reference to quoted prices of similar assets in active markets, adjusted for any terms specific to that asset. For all other assets for which observable inputs are used, fair value is derived through the use of fair value models, such as a discounted cash flow model or other standard pricing models.
NOTE G COMMITMENTS AND CONTINGENT LIABILITIES
Environmental Matters
Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. At September 30, 2007,March 31, 2008, the Corporation had accrued obligations of $72 million for environmental remediation and restoration costs, including $22$21 million for the remediation of Superfund sites. This is management’s best estimate of the costs for remediation and restoration with respect to environmental matters for which the Corporation has accrued liabilities, although the ultimate cost with respect to these particular matters could range up to twice that amount. Inherent uncertainties exist in these estimates primarily due to unknown conditions, changing governmental regulations and legal standards regarding liability, and evolving technologies for handling site remediation and restoration. At December 31, 2006,2007, the Corporation had accrued obligations of $77$75 million for environmental remediation and restoration costs, including $25$23 million for the remediation of Superfund sites. It is the opinion of the Corporation’s management that the possibility is remote that costs in excess of those disclosed will have a material adverse impact on the Corporation’s consolidated financial statements.
Litigation
The Corporation and its subsidiaries are involved in a number of legal proceedings and claims with both private and governmental parties. These cover a wide range of matters, including, but not limited to: product liability; trade regulation; governmental regulatory proceedings; health, safety and environmental matters; employment; patents; contracts; taxes; and commercial disputes.
Separately, the Corporation is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past three decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both actual and punitive damages. The alleged claims primarily relate to products that UCC sold in the past, alleged exposure to asbestos-containing products located on UCC’s premises, and UCC’s responsibility for asbestos suits filed against a former subsidiary, Amchem Products, Inc. (“Amchem”). In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure, or that injuries incurred in fact resulted from exposure to the Corporation’s products.
Influenced by the bankruptcy filings of numerous defendants in asbestos-related litigation and the prospects of various forms of state and national legislative reform, the rate at
9
which plaintiffs filed asbestos-related suits against various companies, including the Corporation and Amchem, increased in 2001, 2002 and the first half of 2003. Since then, the rate of filing has significantly abated. The Corporation expects more asbestos-related suits to be filed against it and Amchem in the future, and will aggressively defend or reasonably resolve, as appropriate, both pending and future claims.
Based on a study completed by Analysis, Research & Planning Corporation (“ARPC”) in January 2003, the Corporation increased its December 31, 2002 asbestos-related liability for pending and future claims for the 15-year period ending in 2017 to $2.2 billion, excluding future defense and processing costs. Since then, the Corporation has compared current asbestos claim and resolution activity to the results of the most recent ARPC study at each balance sheet date to determine whether the accrual continues to be appropriate.
In November 2004,addition, the Corporation has requested ARPC to review the Corporation’s historical asbestos claim and resolution activity andeach November since 2004 to determine the appropriateness of updating its January 2003the most recent ARPC study. In January 2005, ARPC provided the Corporation with a report summarizing the results of its study. At December 31, 2004, the recorded asbestos-related liability for pending and future claims was $1.6 billion. Based on the low end of the range in the January 2005 study, the recorded asbestos-related liability for pending and future claims at December 31, 2004 would be sufficient to resolve asbestos-related claims against UCC and Amchem into 2019. As in its January 2003 study, ARPC did provide estimates for a longer period of time in its January 2005 study, but also reaffirmed its prior advice that forecasts for shorter periods of time are more accurate than those for longer periods of time.
In November 2005, the Corporation requested ARPC to review the Corporation’s 2005 asbestos claim and resolution activity and determine the appropriateness of updating its January 2005 study. In response to that request, ARPC reviewed and analyzed data through October 31, 2005. In January 2006, ARPC stated that an update of its study would not provide a more likely estimate of future events than the estimate reflected in its study of the previous year and, therefore, the estimate in that study remained applicable. Based on the Corporation’s own review of the asbestos claim and resolution activity and ARPC’s response, the Corporation determined that no change to the accrual was required. At December 31, 2005, the recorded asbestos-related liability for pending and future claims was $1.5 billion.
In November 2006, the Corporation requested ARPC to review the Corporation’s historical asbestos claim and resolution activity and determine the appropriateness of updating its most recent study from January 2005 study.2005. In response to that request, ARPC reviewed and analyzed data through October 31, 2006 and concluded that the experience from 2004 through 2006 was sufficient for the purpose of forecasting future filings and values of asbestos claims filed against UCC and Amchem, and could be used in
9
place of previous assumptions to update its January 2005 study. The resulting study, completed by ARPC in December 2006, stated that the undiscounted cost of resolving pending and future asbestos-related claims against UCC and Amchem, excluding future defense and processing costs, through 2021 was estimated to be between approximately $1.2 billion and $1.5 billion. As in its January 2003 and January 2005 study,studies, ARPC provided estimates for a longer period of time in its December 2006 study, but also reaffirmed its prior advice that forecasts for shorter periods of time are more accurate than those for longer periods of time.
Based on ARPC’s December 2006 study and the Corporation’s own review of the asbestos claim and resolution activity, the Corporation decreased its asbestos-related liability for pending and future claims to $1.2 billion at December 31, 2006 which coverscovered the 15-year period ending in 2021 (excluding future defense and processing costs). The reduction was $177 million and was shown as “Asbestos-related credit” in the consolidated statements of income for 2006.income.
In November 2007, the Corporation requested ARPC to review the Corporation’s 2007 asbestos claim and resolution activity and determine the appropriateness of updating its December 2006 study. In response to that request, ARPC reviewed and analyzed data through October 31, 2007. In December 2007, ARPC stated that an update of its study would not provide a more likely estimate of future events than the estimate reflected in its study of the previous year and, therefore, the estimate in that study remained applicable. Based on the Corporation’s own review of the asbestos claim and resolution activity and ARPC’s response, the Corporation determined that no change to the accrual was required. At December 31, 2006,2007, the Corporation’s asbestos-related liability for pending and future claims was $1.1 billion. At December 31, 2007, approximately 2531 percent of the recorded liability related to pending claims and approximately 7569 percent related to future claims.
Based on the Corporation’s review of 20072008 activity, the Corporation determined that no adjustment to the accrual was required at September 30, 2007.March 31, 2008. The Corporation’s asbestos-related liability for pending and future claims was $1.2$1.1 billion at SeptemberMarch 31, 2008. Approximately 30 2007. Approximately 28 percent of the recorded liability related to pending claims and approximately 7270 percent related to future claims.
At December 31, 2002, the Corporation increased the receivable for insurance recoveries related to its asbestos liability to $1.35 billion, substantially exhausting its asbestos product liability coverage. The insurance receivable related to the asbestos liability was determined by the Corporation after a thorough review of applicable insurance policies and the 1985 Wellington Agreement, to which the Corporation and many of its liability insurers are signatory parties, as well as other insurance settlements, with due consideration given to applicable deductibles, retentions and policy limits, and taking into account the solvency and historical payment experience of various insurance carriers. The Wellington Agreement and other agreements with insurers are designed to facilitate an orderly resolution and collection of the Corporation’sUnion Carbide’s insurance policies and to resolve issues that the insurance carriers may raise.
In September 2003, the Corporation filed a comprehensive insurance coverage case, now proceeding in the Supreme Court of the State of New York, County of New York, seeking to confirm its rights to insurance for various asbestos claims and to facilitate an orderly and timely collection of insurance proceeds. This lawsuit was filed against insurers that are not signatories to the Wellington Agreement and/or do not otherwise have agreements in place with the Corporation regarding their asbestos-related insurance coverage, in order to facilitate an orderly resolution and collection of such insurance policies and to resolve issues that the insurance carriers may raise. Although the lawsuit is continuing, through the end of the thirdfirst quarter of 2007,2008, the Corporation hadhas reached settlements with several of the carriers involved in this litigation.
The Corporation’s receivable for insurance recoveries related to its asbestos liability was $476$465 million at September 30, 2007March 31, 2008 and $495$467 million at December 31, 2006.2007. At September 30, 2007March 31, 2008 and December 31, 2006,2007, all of the receivable for insurance recoveries was related to insurers that are not signatories to the Wellington Agreement and/or do not otherwise have agreements in place regarding their asbestos-related insurance coverage.
10
In addition to the receivable for insurance recoveries related to its asbestos liability, the Corporation had receivables for defense and resolution costs submitted to insurance carriers for reimbursement as follows:
Receivables for Costs Submitted to Insurance Carriers
In millions |
| Sept. 30, |
| Dec. 31, |
|
| March 31, |
| Dec. 31, |
| ||||
Receivables for defense costs |
| $ | 29 |
| $ | 34 |
|
| $ | 22 |
| $ | 18 |
|
Receivables for resolution costs |
| 254 |
| 266 |
|
| 248 |
| 253 |
| ||||
Total |
| $ | 283 |
| $ | 300 |
|
| $ | 270 |
| $ | 271 |
|
The Corporation expenses defense costs as incurred. The pretax impact for defense and resolution costs, net of insurance, was $16 million in the third quarter of 2007 ($1 million in the third quarter of 2006) and $58$14 million in the first nine monthsquarter of 2007 ($292008 and $17 million in the first nine monthsquarter of 2006),2007, and was reflected in “Cost of sales.”
After a review of its insurance policies, with due consideration given to applicable deductibles, retentions and policy limits, after taking into account the solvency and historical payment experience of various insurance carriers; existing insurance settlements; and the advice of outside counsel with respect to the applicable insurance coverage law relating to the terms and conditions of its insurance policies, the Corporation continues to believe that its recorded receivable for insurance recoveries from all insurance carriers is probable of collection.
The amounts recorded for the asbestos-related liability and related insurance receivable described above were based upon current, known facts. However, future events, such as the number of new claims to be filed and/or received each year, the average cost of disposing of each such claim, coverage issues among insurers, and the continuing solvency of various
10
insurance companies, as well as the numerous uncertainties surrounding asbestos litigation in the United States, could cause the actual costs and insurance recoveries to be higher or lower than those projected or those recorded.
Because of the uncertainties described above, management cannot estimate the full range of the cost of resolving pending and future asbestos-related claims facing the Corporation and Amchem. Management believes that it is reasonably possible that the cost of disposing of the Corporation’s asbestos-related claims, including future defense costs, could have a material adverse impact on the results of operations and cash flows for a particular period and on the consolidated financial position of the Corporation.
While it is not possible at this time to determine with certainty the ultimate outcome of any of the legal proceedings and claims referred to in this filing, management believes that adequate provisions have been made for probable losses with respect to pending claims and proceedings, and that, except for the asbestos-related matters described above, the ultimate outcome of all known and future claims, after provisions for insurance, will not have a material adverse impact on the results of operations, cash flows and consolidated financial position of the Corporation. Should any losses be sustained in connection with any of such legal proceedings and claims in excess of provisions provided and available insurance, they will be charged to income when determinable.
Purchase Commitments
At December 31, 2006,2007, the Corporation had various outstanding commitments for take or paytake-or-pay agreements, with terms extending from one to tenfifteen years. Such commitments were not in excess of current market prices. The fixed and determinable portion of obligations under purchase commitments at December 31, 20062007 is presented in the following table:
Fixed and Determinable Portion of Take or Pay Obligations at December 31, 2006 In millions |
|
|
| |||||
2007 |
| $ | 14 |
| ||||
Fixed and Determinable Portion of Take-or-Pay Obligations at December 31, 2007 |
|
|
| |||||
In millions |
|
|
| |||||
2008 |
| 8 |
|
| $ | 7 |
| |
2009 |
| 8 |
|
| 7 |
| ||
2010 |
| 7 |
|
| 8 |
| ||
2011 |
| 1 |
|
| 2 |
| ||
2012 and beyond |
| 6 |
| |||||
2012 |
| 2 |
| |||||
2013 and beyond |
| 11 |
| |||||
Total |
| $ | 44 |
|
| $ | 37 |
|
Guarantees
The Corporation has undertaken obligations to guarantee the performance of certain nonconsolidated affiliates (including the OPTIMAL Group and Nippon Unicar Company Limited) and a former subsidiary of the Corporation (via delivery of cash or other assets) if specified triggering events occur.affiliates. Non-performance under a contract for commercial and/or financial obligations by the guaranteed party would trigger the
11
obligation of the Corporation to make payments to the beneficiary of the guarantees. Financial obligations include debt and lease arrangements. The guarantee related to a former subsidiary of the Corporation expired in the second quarter of 2007.
The following table provides a summary of the final expiration, maximum future payments, and recorded liability reflected in the consolidated balance sheets for these guarantees.
Guarantees In millions |
| Final |
| Maximum |
| Recorded |
| ||
Guarantees at September 30, 2007 |
| 2014 |
| $ | 75 |
| $ | 1 |
|
Guarantees at December 31, 2006 |
| 2014 |
| $ | 84 |
| $ | 1 |
|
Guarantees |
| Final |
| Maximum Future Payments |
| Recorded |
| ||
Guarantees at March 31, 2008 |
| 2014 |
| $ | 80 |
| $ | 1 |
|
Guarantees at December 31, 2007 |
| 2014 |
| $ | 77 |
| $ | 1 |
|
Conditional Asset Retirement Obligations
In accordance with FIN No. 47, the Corporation has recognized conditional asset retirement obligations related to asbestos encapsulation as a result of planned demolition and remediation activities at manufacturing and administrative sites in the United States. The aggregate carrying amount of conditional asset retirement obligations was $13$9 million at September 30, 2007March 31, 2008 and December 31, 2006.2007. The discount rate used to calculate the Corporation’s asset retirement obligations was 4.6 percent.5.08 percent, unchanged from December 31, 2007. These obligations are included in the consolidated balance sheets as “Accrued and other current liabilities.”
The Corporation has not recognized conditional asset retirement obligations for which a fair value cannot be reasonably estimated in its consolidated financial statements. It is the opinion of management that the possibility is remote that such conditional asset retirement obligations, when estimable, will have a material adverse impact on the Corporation’s consolidated financial statements based on current costs.
11
NOTE FH PENSION AND OTHER POSTRETIREMENT BENEFITS
Net Periodic Benefit Cost (Credit) for All Significant Plans
Net Periodic Benefit Cost (Credit) for All Significant Plans |
| Three Months Ended |
| Nine Months Ended |
| |||||||||||||||||||||
|
| Defined Benefit Pension Plans |
| Other Postretirement Benefits |
| |||||||||||||||||||||
|
| Three Months Ended |
| Three Months Ended |
| |||||||||||||||||||||
In millions |
| Sept. 30, |
| Sept. 30, |
| Sept. 30, |
| Sept. 30, |
|
| March 31, |
| March 31, |
| March 31, |
| March 31, |
| ||||||||
Defined Benefit Pension Plans: |
|
|
|
|
|
|
|
|
| |||||||||||||||||
Service cost |
| $ | 6 |
| $ | 6 |
| $ | 16 |
| $ | 18 |
|
| $ | 5 |
| $ | 5 |
| $ | 1 |
| $ | 1 |
|
Interest cost |
| 53 |
| 53 |
| 159 |
| 159 |
|
| 56 |
| 53 |
| 7 |
| 7 |
| ||||||||
Expected return on plan assets |
| (79 | ) | (83 | ) | (237 | ) | (249 | ) |
| (78 | ) | (79 | ) | — |
| — | �� | ||||||||
Amortization of prior service cost |
| — |
| 1 |
| 1 |
| 1 |
| |||||||||||||||||
Amortization of prior service cost (credit) |
| 2 |
| 1 |
| (1 | ) | (1 | ) | |||||||||||||||||
Amortization of net loss |
| 7 |
| 7 |
| 21 |
| 23 |
|
| 1 |
| 7 |
| — |
| 1 |
| ||||||||
Net periodic benefit credit |
| $ | (13 | ) | $ | (16 | ) | $ | (40 | ) | $ | (48 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Other Postretirement Benefits: |
|
|
|
|
|
|
|
|
| |||||||||||||||||
Service cost |
| $ | 1 |
| $ | 1 |
| $ | 3 |
| $ | 3 |
| |||||||||||||
Interest cost |
| 7 |
| 8 |
| 21 |
| 24 |
| |||||||||||||||||
Amortization of prior service credit |
| — |
| (1 | ) | (2 | ) | (3 | ) | |||||||||||||||||
Amortization of net loss |
| — |
| 1 |
| 1 |
| 3 |
| |||||||||||||||||
Net periodic benefit cost |
| $ | 8 |
| $ | 9 |
| $ | 23 |
| $ | 27 |
| |||||||||||||
Net periodic benefit cost (credit) |
| $ | (14 | ) | $ | (13 | ) | $ | 7 |
| $ | 8 |
|
NOTE GI RELATED PARTY TRANSACTIONS
The Corporation sells products to Dow to simplify the customer interface process. Products are sold to and purchased from Dow at market-based prices in accordance with the terms of Dow’s long-standing intercompany pricing policies. The Corporation also procures certain commodities and raw materials through a Dow subsidiary and pays a commission to that Dow subsidiary based on the volume and type of commodities and raw materials purchased. The commission expense is included in “Sundry income (expense) —– net” in the consolidated statements of income. Purchases from that Dow subsidiary were approximately $803 million$1.0 billion in the thirdfirst quarter of 2007 ($847 million in the third quarter of 2006)2008 and $2,321$693 million in the first nine monthsquarter of 2007 ($2,377 million in the first nine months of 2006).2007.
The Corporation has a master services agreement with Dow whereby Dow provides services including but not limited to, accounting, legal, treasury (investments, cash management, risk management, insurance), procurement, human resources, environmental, health and safety, and business management for UCC. Under the master services agreement with Dow, for general administrative and overhead type services that Dow routinely allocates to various businesses, UCC is charged the cost of those services based on the Corporation’s and Dow’s relative manufacturing conversion costs. This arrangement results in a quarterly charge of approximately $6 million (included in “Sundry income (expense) —– net”).
For services that Dow routinely charges based on effort, UCC is charged the cost of such services on a fully absorbed basis, which includes direct and indirect costs. Additionally, certain Dow employees are contracted to UCC and Dow is reimbursed for all direct employment costs of such employees. Management believes the method used for determining
12
expenses charged by Dow is reasonable. Dow provides these services by leveraging its centralized functional service centers to provide services at a cost that management believes provides an advantage to the Corporation.
The monitoring and execution of risk management policies related to interest rate and foreign currency risks, which are based on Dow’s risk management philosophy, are provided as a service to UCC.
As part of Dow’s cash management process, UCC is a party to revolving loans with Dow that have LIBOR-based interest rates with varying maturities. At September 30, 2007,March 31, 2008, the Corporation had a note receivable of $3.0$3.5 billion ($3.2 billion at December 31, 2007) from Dow under a revolving loan agreement. The Corporation may draw from this note receivable in support of its daily working capital requirements and, as such, the net effect of cash inflows and outflows under this revolving loan agreement is presented in the consolidated statements of cash flows as an operating activity.
The Corporation also has a separate revolving credit agreement with Dow that allows the Corporation to borrow or obtain credit enhancements up to an aggregate of $1 billion that matures December 30, 2008, pursuant to an amendment effective as of September 30, 2007; however,2007. Dow may demand repayment with a 30-day written notice to the Corporation, subject to certain restrictions. A related collateral agreement provides for the replacement of certain existing pledged assets, primarily equity interests in various subsidiaries and joint ventures, with cash collateral. At September 30, 2007, $812March 31, 2008, $811 million ($813 million at December 31, 2007) was available under the revolving credit agreement. The cash collateral wasis reported as “Noncurrent receivables from related companies” in the consolidated balance sheets.
12
The losses and additional costs incurred by the Corporation in 2005 due to hurricane Katrina were covered by the Corporation’s insurance program. The Corporation has an insurance receivable for losses incurred of $105$99 million at March 31, 2008 from its insurer (an affiliate of Dow), which was reported in “Noncurrent receivables from related companies” in the consolidated balance sheets at September 30, 2007.. Additionally, the Corporation has insurance coverage for lost sales and margins caused by hurricane Katrina. No amount of recovery for lost sales and margins had been recognized at September 30, 2007,March 31, 2008, and will only be recognized when the amount of recovery is realized through agreement among the insurers.
NOTE H 2006 RESTRUCTURINGThe Corporation received cash dividends from its related company investments of $77 million in the first quarter of 2008, including $75 million from Dow International Holdings LLC (“DIHC”). These dividends were included in “Sundry income (expense) – net.”
In December 2007, under the thirdterms of a contribution agreement among UCC, Dow and DIHC, the Corporation contributed its 42.5 percent ownership interest in EQUATE Petrochemical Company K.S.C. (“EQUATE”) to UC Investment B.V. (“UCIBV”), a newly formed Dutch limited liability company in which the Corporation was the sole shareholder. The Corporation then contributed its ownership interest in UCIBV to DIHC in exchange for an increased ownership interest in DIHC. At March 31, 2008, the Corporation had a 19.13 percent ownership interest in DIHC which the Corporation accounts for using the cost method. The Corporation has the right to sell its shares in DIHC to Dow (anytime during the period January 1, 2009 through December 31, 2011) for an amount calculated using a formula in the agreement, which intends to approximate fair value. In accordance with the terms of the contribution agreement, Dow made a capital contribution to UCC in the amount of $191 million in the first quarter of 2006, the Corporation recorded restructuring charges totaling $13 million resulting from decisions made by management in the third quarter to improve the competitiveness of its global operations. The decision resulted in the write-off of the net book value of three manufacturing facilities totaling $10 million (the largest of which was $8 million associated with the shutdown of the peroxymeric chemicals production facility in St. Charles, Louisiana, in October 2006), and the write-off of the net book value of fixed assets related to the dissolution of a consolidated joint venture in China (which ceased operations in October 2006) totaling $3 million. The charges were shown as “Restructuring charges” in the consolidated statements of income.2008.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Pursuant to General Instruction H of Form 10-Q “Omission of Information by Certain Wholly-Owned Subsidiaries,” this section includes only management’s narrative analysis of the results of operations for the three-and nine-month periodsthree-month period ended September 30, 2007,March 31, 2008, the most recent periods,period, compared with the three-and nine-month periodsthree-month period ended September 30, 2006,March 31, 2007, the corresponding periodsperiod in the preceding fiscal year.
References below to “Dow” refer to The Dow Chemical Company and its consolidated subsidiaries, except as the context otherwise indicates.
TheUnion Carbide Corporation’s (the “Corporation” or “UCC”) business activities comprise components of Dow’s global operations rather than stand-alone operations. Dow conducts its worldwide operations through global businesses. Because there are no separable reportable business segments for UCC under Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information,” and no detailed business information is provided to a chief operating decision maker regarding the Corporation’s stand-alone operations, the Corporation’s results are reported as a single operating segment.
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements made by or on behalf of Union Carbide Corporation (the “Corporation” or “UCC”).the Corporation. This section covers the current performance and outlook of the Corporation. The forward-looking statements contained in this section and in other parts of this document involve risks and uncertainties that may affect the Corporation’s operations, markets, products, services, prices and other factors as more fully discussed elsewhere and in filings with the U.S. Securities and Exchange Commission (SEC).Commission. These risks and uncertainties include, but are not limited to, economic, competitive, legal, governmental and technological factors. Accordingly, there is no assurance that the Corporation’s expectations will be realized. The Corporation assumes no obligation to provide revisions to any forward-looking statements should circumstances change, except as otherwise required by securities and other applicable laws.
Total net sales for the thirdfirst quarter of 20072008 were $1,863$2,035 million compared with $1,900 million for the third quarter of 2006, a decrease of 2 percent. Total net sales were $5,488$1,726 million for the first nine monthsquarter of 2007, an increase of 18 percent.
Net sales to related companies for the first quarter of 2008 were $1,989 million compared with $5,729$1,673 million for the first nine monthsquarter of 2006, a decrease2007, an increase of 419 percent.Selling prices to Dow are based on market prices for the related products. Average selling prices for most products were higher in the thirdfirst quarter of 2007 and on a year-to-date basis2008 compared with the same periodsfirst quarter of last year,2007, led by ethylene glycol (“EG”), wirepolyethylene (“PE”) and cable compounds and oxo products.polypropylene (“PP”). Sales volume was mixed with overall volume downup in the thirdfirst quarter of 2007 and on a year-to-date basis2008 compared with the same periodsfirst quarter of last year. Solid volume2007. Volume growth for several products (led by polyethylene, oxo products,EG and polypropylene) wasPE) more than offset by declines in certain of the Corporation’s other products, principally EG (duePP. The decline in PP volume was related to planned and unplanned outages at two production facilities and to the restructuring of certain sales agreements). Total net sales for the first nine months of 2006 included significant lump sum technology licensing revenue. Technology licensing revenue varies from period to period due to the nature of the business.
Cost of sales declined slightly from $1,727 million in the third quarter of 2006 to $1,703 million in the third quarter of 2007 principally due to lower sales volume. On a year to date basis, cost of sales increased 1 percent from $4,966 million to $5,031 million, reflecting higher feedstock costs.
Restructuring charges of $13 million in the third quarter of 2006 included the write-off of the net book value of three manufacturing facilities totaling $10 million (the largest of which was $8 million associated with the shutdown of the peroxymeric chemicals production facilityPP plant in St. Charles, Louisiana in October 2006)the fourth quarter of 2007.
Cost of sales increased 23 percent from $1,598 million in the first quarter of 2007 to $1,961 million in the first quarter of 2008 principally due to higher feedstock and the write-off of the net book value of fixed assets related to the dissolution of a consolidated joint venture in China (which ceased operations in October 2006) totaling $3 million.energy costs and higher sales volume.
Equity in earnings of nonconsolidated affiliates decreased $14$70 million in the thirdfirst quarter of 20072008 compared with the same quarter last year, as improved earnings atin 2007 principally due to the Corporation’s fourth quarter of 2007 contribution of its 42.5 percent ownership interest in EQUATE Petrochemical Company K.S.C. (“EQUATE”) were more than offset by lower reported earnings from Univation Technologies, LLC and the OPTIMAL Groupto Dow International Holding Company (“OPTIMAL”DIHC”). Year to date, equity for an increased ownership share in earnings of nonconsolidated affiliatesDIHC. Offsetting this decline was $369 million compared with $288 million last yearan increase in sundry income – net, due to higher reported earningsa dividend of $75 million from EQUATE and OPTIMAL. Year-to-date results for EQUATE and OPTIMAL in 2006 were lower due to planned maintenance turnaroundsDIHC in the first halfquarter of 2006.
2008. Sundry expense —income (expense) – net includes a variety of income and expense items such as the gain or loss on foreign currency exchange, dividends from investments, commissions, charges for management services provided by Dow and gains and losses on sales of investments and assets. Sundry expense —income (expense) – net for the thirdfirst quarter of 20072008 was $6income of $70 million compared with $16 million for the third quarterexpense of last year, and included a gain on the sale of land of $10 million. Year to date, sundry
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expense — net was $33 million compared with $60 million for the first nine monthsquarter of last year. In addition2007.
See Note I to the gain onConsolidated Financial Statements for information regarding the sale of land, Sundry expense for the first nine months of 2007 was also impacted by a higher level of dividend income and lower commission expense.change in ownership.
Interest income was $49 million in the third quarter of 2007 compared with $34 million in the third quarter of 2006. Year to date, interest income was $129 million, up from $92$32 million in the first nine monthsquarter of 2006. The increase for2008 compared with $37 million in the first quarter and on a year-to-date basis wasof 2007, due to the significantly higherlower interest rates, partially offset by an increased level of interest-bearinginterest bearing assets. Interest expense and amortization of debt discount decreased $3 million in the first quarter of 2008 compared with the first quarter of 2007.
The effective tax rate fluctuates based on, among other factors, where income is earned, the level of after-tax income from joint ventures, dividends received from investments in related companies and the level of income relative to tax credits available. The effective tax rate for the thirdfirst quarter of 20072008 was 55.120.9 percent compared with 24.021.5 percent for the same quarter last year. The effective tax rate for the third quarter of 2007 was negatively affected by an increase in the estimated annual tax rate for 2007, caused by a revised forecast of earnings for the Corporation, and the recognition of tax contingencies. Year to date, the effective tax rate was 36.5 percent versus 31.5 percent last year.
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The Corporation reported net income of $136 million for the third quarter of 2007, down significantly from $218 million for the third quarter of 2006, due primarily to an increase in the provision for income taxes. Net income for the first nine months of 2007 declined to $517 million from $656$155 million for the first nine monthsquarter of last year as a significant decline in technology licensing revenue2008, compared with $186 million for the first quarter of 2007. While the results for the first quarter of 2008 were favorably impacted by higher dividends from investments, this improvement was more than offset by lower margins due to increased feedstock and energy costs, and lower equity earnings.
On December 13, 2007, Dow and Petrochemical Industries Company of the improvementState of Kuwait, a wholly owned subsidiary of Kuwait Petroleum Corporation, announced plans to form a 50:50 joint venture that will be a market-leading, global petrochemicals company. The joint venture, to be headquartered in equity earnings for the first nine monthsUnited States, will manufacture and market polyethylene, ethyleneamines, ethanolamines, polypropylene, and polycarbonate. The joint venture is expected to have revenues of 2007.more than $11 billion and employ more than 5,000 people worldwide. It is anticipated that a significant part of UCC’s U.S.-based manufacturing assets will be included in the new joint venture. While the transaction is subject to the completion of definitive agreements, customary conditions and regulatory approvals, it is anticipated that the joint venture between Dow and PIC will close in late 2008. Management is currently evaluating the accounting treatment and the impact on the Corporation’s financial statements.
Recent Accounting ChangesPronouncements
See Note B to the Consolidated Financial Statements for a discussionsummary of recent accounting pronouncements. In addition, see Note F to the Consolidated Financial Statements for the Corporation’s disclosures about fair value measurements. The sensitivity of fair value estimates is immaterial relative to the assets and liabilities measured at fair value, as well as to the total equity of the Corporation.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make judgments, assumptions and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Note A to the Consolidated Financial Statements in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 20062007 (“20062007 10-K”) describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. The Corporation’s critical accounting policies that are impacted by judgments, assumptions and estimates are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Corporation’s 20062007 10-K. Since December 31, 2006,2007, there have been no material changes in the Corporation’s critical accounting policies.
Asbestos-Related Matters
Introduction
The Corporation is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past three decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both actual and punitive damages. The alleged claims primarily relate to products that UCC sold in the past, alleged exposure to asbestos-containing products located on UCC’s premises, and UCC’s responsibility for asbestos suits filed against a former subsidiary, Amchem Products, Inc. (“Amchem”). In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure, or that injuries incurred in fact resulted from exposure to the Corporation’s products.
Influenced by the bankruptcy filings of numerous defendants in asbestos-related litigation and the prospects of various forms of state and national legislative reform, the rate at which plaintiffs filed asbestos-related suits against various companies, including the Corporation and Amchem, increased in 2001, 2002 and the first half of 2003. Since then, the rate of filing has significantly abated. The Corporation expects more asbestos-related suits to be filed against it and Amchem in the future, and will aggressively defend or reasonably resolve, as appropriate, both pending and future claims.
The table below provides information regarding asbestos-related claims filed against the Corporation and Amchem:
|
| 2007 |
| 2006 |
|
| 2008 |
| 2007 |
|
Claims unresolved at January 1 |
| 111,887 |
| 146,325 |
|
| 90,322 |
| 111,887 |
|
Claims filed |
| 7,696 |
| 12,388 |
|
| 2,716 |
| 3,085 |
|
Claims settled, dismissed or otherwise resolved |
| (15,681 | ) | (45,006 | ) |
| (2,854 | ) | (2,225 | ) |
Claims unresolved at September 30 |
| 103,902 |
| 113,707 |
| |||||
Claims unresolved at March 31 |
| 90,184 |
| 112,747 |
| |||||
Claimants with claims against both UCC and Amchem |
| 35,114 |
| 39,432 |
|
| 28,893 |
| 38,901 |
|
Individual claimants at September 30 |
| 68,788 |
| 74,275 |
| |||||
Individual claimants at March 31 |
| 61,291 |
| 73,846 |
|
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Plaintiffs’ lawyers often sue dozens or even hundreds of defendants in individual lawsuits on behalf of hundreds or even thousands of claimants. As a result, the damages alleged are not expressly identified as to UCC, Amchem or any other particular defendant, even when specific damages are alleged with respect to a specific disease or injury. In fact, there are no personal injury cases in which only the Corporation and/or Amchem are the sole named defendants. For these reasons and based upon the Corporation’s litigation and settlement experience, the Corporation does not consider the damages alleged against it and Amchem to be a meaningful factor in its determination of any potential asbestos liability.
Estimating the Liability
Based on a study completed by Analysis, Research & Planning Corporation (“ARPC”) in January 2003, the Corporation increased its December 31, 2002 asbestos-related liability for pending and future claims for the 15-year period ending in 2017 to $2.2 billion, excluding future defense and processing costs. Since then, the Corporation has compared current asbestos claim and resolution activity to the results of the most recent ARPC study at each balance sheet date to determine whether the accrual continues to be appropriate.
In November 2004,addition, the Corporation has requested ARPC to review the Corporation’sUnion Carbide’s historical asbestos claim and resolution activity andeach November since 2004 to determine the appropriateness of updating its January 2003the most recent ARPC study. In January 2005, ARPC provided the Corporation with a report summarizing the results of its study. At December 31, 2004, the recorded asbestos-related liability for pending and future claims was $1.6 billion. Based on the low end of the range in the January 2005 study, the recorded asbestos-related liability for pending and future claims at December 31, 2004 would be sufficient to resolve asbestos-related claims against UCC and Amchem into 2019. As in its January 2003 study, ARPC did provide estimates for a longer period of time in its January 2005 study, but also reaffirmed its prior advice that forecasts for shorter periods of time are more accurate than those for longer periods of time.
In November 2005, the Corporation requested ARPC to review the Corporation’s 2005 asbestos claim and resolution activity and determine the appropriateness of updating its January 2005 study. In response to that request, ARPC reviewed and analyzed data through October 31, 2005. In January 2006, ARPC stated that an update of its study would not provide a more likely estimate of future events than the estimate reflected in its study of the previous year and, therefore, the estimate in that study remained applicable. Based on the Corporation’s own review of the asbestos claim and resolution activity and ARPC’s response, the Corporation determined that no change to the accrual was required. At December 31, 2005, the recorded asbestos-related liability for pending and future claims was $1.5 billion.
In November 2006, the Corporation requested ARPC to review the Corporation’s historical asbestos claim and resolution activity and determine the appropriateness of updating its most recent study from January 2005 study.2005. In response to that request, ARPC reviewed and analyzed data through October 31, 2006 and concluded that the experience from 2004 through 2006 was sufficient for the purpose of forecasting future filings and values of asbestos claims filed against UCC and Amchem, and could be used in place of previous assumptions to update its January 2005 study. The resulting study, completed by ARPC in December 2006, stated that the undiscounted cost of resolving pending and future asbestos-related claims against UCC and Amchem, excluding future defense and processing costs, through 2021 was estimated to be between approximately $1.2 billion and $1.5 billion. As in its January 2003 and January 2005 study,studies, ARPC provided estimates for a longer period of time in its December 2006 study, but also reaffirmed its prior advice that forecasts for shorter periods of time are more accurate than those for longer periods of time.
Based on ARPC’s December 2006 study and the Corporation’s own review of the asbestos claim and resolution activity, the Corporation decreased its asbestos-related liability for pending and future claims to $1.2 billion at December 31, 2006 which coverscovered the 15-year period ending in 2021 (excluding future defense and processing costs). The reduction was $177 million and was shown as “Asbestos-related credit” in the consolidated statements of income for 2006.income.
In November 2007, the Corporation requested ARPC to review the Corporation’s 2007 asbestos claim and resolution activity and determine the appropriateness of updating its December 2006 study. In response to that request, ARPC reviewed and analyzed data through October 31, 2007. In December 2007, ARPC stated that an update of its study would not provide a more likely estimate of future events than the estimate reflected in its study of the previous year and, therefore, the estimate in that study remained applicable. Based on the Corporation’s own review of the asbestos claim and resolution activity and ARPC’s response, the Corporation determined that no change to the accrual was required. At December 31, 2006,2007, the Corporation’s asbestos-related liability for pending and future claims was $1.1 billion. At December 31, 2007, approximately 2531 percent of the recorded liability related to pending claims and approximately 7569 percent related to future claims.
Based on the Corporation’s review of 20072008 activity, the Corporation determined that no adjustment to the accrual was required at September 30, 2007.March 31, 2008. The Corporation’s asbestos-related liability for pending and future claims was $1.2$1.1 billion at SeptemberMarch 31, 2008. Approximately 30 2007. Approximately 28 percent of the recorded liability related to pending claims and approximately 7270 percent related to future claims.
Defense and Resolution Costs
The following table provides information regarding defense and resolution costs related to asbestos-related claims filed against the Corporation and Amchem:
Defense and Resolution Costs
Defense and Resolution Costs |
| Nine Months Ended |
| Aggregate Costs |
| |||||
In millions |
| Sept. 30, |
| Sept. 30, |
| to Date as of |
| |||
Defense costs |
| $ | 58 |
| $ | 45 |
| $ | 539 |
|
Resolution costs |
| $ | 48 |
| $ | 95 |
| $ | 1,230 |
|
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|
| Three Months Ended |
| Aggregate Costs |
| |||||
In millions |
| March 31, |
| March 31, |
| to Date as of |
| |||
Defense costs |
| $ | 14 |
| $ | 17 |
| $ | 579 |
|
Resolution costs |
| $ | 42 |
| $ | 16 |
| $ | 1,312 |
|
The average resolution payment per asbestos claimant and the rate of new claim filings has fluctuated both up and down since the beginning of 2001. Union Carbide’s management expects such fluctuations to continue in the future based upon a number of factors, including the number and type of claims settled in a particular period, the jurisdictions in which such claims arose, and the extent to which any proposed legislative reform related to asbestos litigation is being considered.
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The Corporation expenses defense costs as incurred. The pretax impact for defense and resolution costs, net of insurance, was $16$14 million in the thirdfirst quarter of 2007 ($12008 and $17 million in the thirdfirst quarter of 2006) and $58 million for the first nine months of 2007, ($29 million for the first nine months of 2006), and was reflected in “Cost of sales.”
Insurance Receivables
At December 31, 2002, the Corporation increased the receivable for insurance recoveries related to its asbestos liability to $1.35 billion, substantially exhausting its asbestos product liability coverage. The insurance receivable related to the asbestos liability was determined after a thorough review of applicable insurance policies and the 1985 Wellington Agreement, to which the Corporation and many of its liability insurers are signatory parties, as well as other insurance settlements, with due consideration given to applicable deductibles, retentions and policy limits, and taking into account the solvency and historical payment experience of various insurance carriers. The Wellington Agreement and other agreements with insurers are designed to facilitate an orderly resolution and collection of the Corporation’s insurance policies and to resolve issues that the insurance carriers may raise.
In September 2003, the Corporation filed a comprehensive insurance coverage case, now proceeding in the Supreme Court of the State of New York, County of New York, seeking to confirm its rights to insurance for various asbestos claims and to facilitate an orderly and timely collection of insurance proceeds. This lawsuit was filed against insurers that are not signatories to the Wellington Agreement and/or do not otherwise have agreements in place with the Corporation regarding their asbestos-related insurance coverage, in order to facilitate an orderly resolution and collection of such insurance policies and to resolve issues that the insurance carriers may raise. Although the lawsuit is continuing, through the end of the thirdfirst quarter of 2007,2008, the Corporation had reached settlements with several of the carriers involved in this litigation.
The Corporation’s receivable for insurance recoveries related to its asbestos liability was $476$465 million at September 30, 2007March 31, 2008 and $495$467 million at December 31, 2006.2007. At September 30, 2007March 31, 2008 and December 31, 2006,2007, all of the receivable for insurance recoveries was related to insurers that are not signatories to the Wellington Agreement and/or do not otherwise have agreements in place regarding their asbestos-related insurance coverage.
In addition to the receivable for insurance recoveries related to its asbestos liability, the Corporation had receivables for defense and resolution costs submitted to insurance carriers for reimbursement as follows:
Receivables for Costs Submitted to Insurance Carriers
In millions |
| Sept. 30, |
| Dec. 31, |
|
| March 31, |
| Dec. 31, |
| ||||
Receivables for defense costs |
| $ | 29 |
| $ | 34 |
|
| $ | 22 |
| $ | 18 |
|
Receivables for resolution costs |
| 254 |
| 266 |
|
| 248 |
| 253 |
| ||||
Total |
| $ | 283 |
| $ | 300 |
|
| $ | 270 |
| $ | 271 |
|
After a review of its insurance policies, with due consideration given to applicable deductibles, retentions and policy limits, after taking into account the solvency and historical payment experience of various insurance carriers; existing insurance settlements; and the advice of outside counsel with respect to the applicable insurance coverage law relating to the terms and conditions of its insurance policies, the Corporation continues to believe that its recorded receivable for insurance recoveries from all insurance carriers is probable of collection.
Summary
The amounts recorded for the asbestos-related liability and related insurance receivable described above were based upon current, known facts. However, future events, such as the number of new claims to be filed and/or received each year, the average cost of disposing of each such claim, coverage issues among insurers, and the continuing solvency of various insurance companies, as well as the numerous uncertainties surrounding asbestos litigation in the United States, could cause the actual costs and insurance recoveries to be higher or lower than those projected or those recorded.
Because of the uncertainties described above, management cannot estimate the full range of the cost of resolving pending and future asbestos-related claims facing the Corporation and Amchem. Management believes that it is reasonably possible that the cost of disposing of the Corporation’s asbestos-related claims, including future defense costs, could have a material adverse impact on the results of operations and cash flows for a particular period and on the consolidated financial position of the Corporation.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Omitted pursuant to General Instruction H of Form 10-Q.
ITEM 4.4T. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s Disclosure Committee and the Corporation’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures pursuant to paragraph (b) of Exchange Act Rule 15d-15(b); and whether any change has occurred in the Corporation’s internal control over financial reporting pursuant to Exchange Act Rule 15d-15(d).Rules 13a-15 or 15d-15. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures are effective and thatwere effective.
Changes in Internal Control Over Financial Reporting
There were no changechanges in the Corporation’s internal control over financial reporting occurredidentified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that was conducted during the Corporation’s most recentlast fiscal quarter that have materially affected, or isare reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
No material developments in asbestos-related matters occurred during the thirdfirst quarter of 2007.2008. For a summary of the history and current status of asbestos-related matters, see Management’s Discussion and Analysis of Financial Condition and Results of Operations, Asbestos-Related Matters; and Note EG to the Consolidated Financial Statements.
There were no material changes in the Corporation’s risk factors in the thirdfirst quarter of 2007.2008.
See the Exhibit Index on page 20 of this Quarterly Report on Form 10-Q for exhibits filed with this report.
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Union Carbide Corporation and Subsidiaries
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| UNION CARBIDE CORPORATION |
|
| Registrant |
Date: OctoberApril 29, 2007
2008
|
| By: | /s/ WILLIAM H. WEIDEMAN |
|
|
| William H. Weideman |
|
|
| Vice President and Controller |
|
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| The Dow Chemical Company |
|
|
| Authorized Representative of |
|
|
| Union Carbide Corporation |
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| By: | /s/ EDWARD W. RICH | |
|
|
| Edward W. Rich | |
|
|
| Vice President, Treasurer and | |
|
|
| Chief Financial Officer | |
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Union Carbide Corporation and Subsidiaries
EXHIBIT NO. |
| DESCRIPTION |
|
|
|
| |
|
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| |
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|
| |
23 |
| Analysis, Research & Planning Corporation’s Consent. | |
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|
| |
31.1 |
| Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
|
|
| |
31.2 |
| Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
|
|
| |
32.1 |
| Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
|
|
| |
32.2 |
| Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
20